The S&P CNX Nifty is the headline index on the National Stock Exchange of India Ltd.
(NSE). The S&P CNX Nifty tracks the behavior of a portfolio of blue chip companies,
the largest and most liquid Indian securities. It includes 50 of the approximately 935
companies listed on the NSE, captures approximately 60% of its equity market
capitalization and is a true reflection of the Indian stock market.

The S&P CNX Nifty covers 22 sectors of the Indian economy and offers investment
managers exposure to the Indian market in one efficient portfolio. The index has been
trading since April 1996 and is well suited for benchmarking, index funds and indexbased
derivatives.

NSE Index, also called the Nifty is the benchmark index for large cap companies by amount of liquidity on the National Stock Exchange in India. It covers 25 sectors of the Indian economy, 50 of the most liquid blue chip stocks and covers 60% of the total market capitalization of the NSE[1].

Partnership

The S&P CNX Nifty is owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between the NSE and CRISIL. IISL is India’s first
specialized company focused on the index as a core product. IISL has a licensing and
marketing agreement with Standard & Poor’s, who are world leaders in index services.

Highlights

The S&P CNX Nifty is a diversified 50 stock, market-capitalization-weighted index for
India, accounting for 22 sectors of the economy. It is used for a variety of purposes such
as benchmarking fund portfolios, index based derivatives and index funds.

The S&P CNX Nifty is based on solid economic research and is created for those
interested in investing and trading in Indian equities.

Market Representation

The S&P CNX Nifty stocks represent about 60% of the total market capitalization of the National Stock Exchange (NSE).

Diversification

The S&P CNX Nifty is a diversified index, accurately reflecting overall market conditions. The reward-to-risk ratio of S&P CNX Nifty is higher than other
leading indices, making it a more attractive portfolio, hence offering similar returns, but
at lesser risk.

Liquidity

Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify
for possible inclusion in the S&P CNX Nifty, it has to reliably have market impact cost
below 0.75 %, when doing S&P CNX Nifty trades of five million rupees (Rs). The
current impact cost of the S&P CNX Nifty for a portfolio size of Rs 5 million is 0.07%.

Hedging Effectiveness

The basic risk of the S&P CNX Nifty futures will be lower,
compared to other index portfolios, owing to the superior liquidity of the S&P CNX Nifty
constituent stocks and of the NSE. The S&P CNX Nifty has higher correlations with
typical portfolios in India, compared to other indices. These two factors imply that
hedging using S&P CNX Nifty futures is superior.

Index Family- S&P CNX Defty

The S&P CNX Defty is a U.S. dollar-denominated index based on the
S&P CNX Nifty. This index has been developed to provide a benchmark to the
international investors, providing them with an instrument for measuring returns on their
equity investment in dollar terms. While the underlying S&P CNX Nifty is calculated in
Indian rupees, the S&P CNX Defty is calculated and denominated in U.S. dollars. This
ensures that the risk arising out of currency fluctuation is covered through the S&P CNX
Defty.

Weighting and Calculations

Like most S&P indices, the Nifty is a market capitalization weighted index based on the free float method. They involve the total market capitalization of the companies weighted by their effect on the index, so the larger stocks would make more of a difference to the index as compared to a smaller market cap company. The basic formula for any index is (be it capitalization weighted or any other stock index)[2]:

The Free float adjustment factor represents the proportion of shares that is freefloated as a percentage of issued shares and then its rounded up to the nearest mulitple of 5% for calculation purposes. To find the free-float capitalization of a company, first find its market cap (number of outstanding shares x share price) then multiply by its free-float factor. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders.

While one might track this portfolio’s value in dollar terms, it would probably be an unwieldy number – for example, the S&P 500 market value is roughly $11.8 trillion. Rather than deal with ten or more digits, the figure is scaled to a more easily handled number, currently around 1250. Dividing the portfolio market value by a factor, usually called the Index divisor, does the scaling.

Continuity in index values is maintained by adjusting the divisor for all changes in the constituents’ share capital after the base date. This includes additions and deletions to the index, rights issues, share buybacks and issuances, and spin-offs. The divisor’s time series is, in effect, a chronological summary of all changes affecting the base capital of the index. The divisor is adjusted such that the index value at an instant just prior to a change in base capital equals the index value at an instant immediately following that change[3].

Composition

Eligibility

For companies to be eligible for the Nifty, they need to satisfy the following criteria as per the S&P rules[4]:

Liquidity: Liquidity is measured by impact cost of the company on the index. Each company must have traded at an average impact cost of 75% or less for the preceding six months for 90% of the trades. Impact cost measures the difference between the ideal selling price of a security and the actual price. This is the percentage mark up suffered while buying/selling the desired quantity of a security compared to its ideal price -- (best buy best sell)/2. The more liquid a security, the greater the chance that its shares trade at prices close to the ideal price. Highly liquid securities have very low impact cost.

Market Capitalization:Each company must have a market capitalization equal to or exceeding Rs. 5 billion for the preceding six months.

Public Float: Each company must have at least 12% of it outstanding shares available for public trading.

Domicile: The company must be domiciled in India and trade on the NSE.